Will Restructured Loans Start Pinching Indian Banks?

Loans recast under the Reserve Bank of India’s first restructuring window in 2020 will see the moratorium period offered to them come to a close between March and September 2022.

Restructured in August 2020, borrowers holding these loans were offered a two-year moratorium period to tide over economic difficulties brought on by the pandemic. During this time, they were not required to pay the principal amount as part of their repayments. While a two-year standstill was allowed, banks typically offered customers relief for up to 18 months.

According to data from the Reserve Bank of India, 0.9% of the advances across the banking sector were restructured under the first round of relief provided. Another 1.5% has been restructured by late November 2021, according to data included in the RBI's Financial Stability Report released in December 2021. The window for restructuring under the second round closed in December 2021.

According to ICRA, Rs 1 lakh crore in loans were restructured in the first round, with 60% of this amount accounted for by large corporates and the balance by small businesses and retail borrowers. Another Rs 1.2 lakh crore was restructured in the second round.

”The standard restructured loan book for banks is estimated to be 3% for the banking sector, though it varies from 0.5% to 8.0% across various banks. Within the overall restructured loan book, 20% is accounted for by large corporations, while the rest is largely retail and small businesses, including MSMEs,“ said Anil Gupta, vice president and co-group head, financial sector ratings, ICRA.

Now, as the loans begin to return to a regular payment schedule, most banks believe that large corporate and retail borrowers have seen their financial position strengthen enough to withstand the higher outgo.

Small businesses, however, may still face difficulties in pockets.

"Within the SME portfolio, there may be some pockets of stress in sectors that are high-touch and dependent on physical walk-ins, such as hospitality, restaurants and retail," said Rajiv Anand, deputy managing director, Axis Bank Ltd.

These are sectors where business still remains below pre-Covid times and where disruptions persisted longer than expected.

Small and medium businesses which have lost their sole entrepreneurs are facing survival issues, said Sunil Mehta, chief executive of the Indian Banks' Association. "Those who survived the pandemic have started paying back," said Mehta, adding that the "problem is under control".

In the retail segment, asset-backed loans like housing loans are not seen at risk. The biggest chunk of retail loans comes from housing loans and generally people don't risk that, said a public sector banker, who spoke on the condition of anonymity. The risk of stress in retail loans emerges from education and vehicle loans, this person added.

Lenders also believe that self-employed borrowers are at greater risk than salaried employees who saw a quicker rebound in their earnings. This segment is mostly funded by NBFCs, not by banks, the banker quoted above said.

"Self-employed customers were worst hit by the pandemic. Most of them have started crawling back to normalcy but some of them are still finding it hard to service their debt," said Mehta.

"It is difficult to predict how the retail and small and medium loans will recover in the future, but right now for us they are performing well," said PR Rajagopal, executive director of Bank of India.

Should stress build up in the small business loan segment, it will add to already high delinquencies.

India Ratings and Research, in a February report, highlighted that the stressed asset ratio in the MSME segment, which includes gross non-performing assets and restructured accounts, could increase to 15.8% by the end of FY22 from 11.7% by the end of FY21. The agency expects stress to rise further to 16.7% in FY23.

"While the government and the RBI have announced several measures to mitigate the crisis in these segments, we could see a lag in revival, maybe by a few quarters, relative to bounce back in other segments," said Siji Philip, senior research analyst, Axis Securities.

Loans given to large corporates, which were the largest contributors to bad loans in the last lending cycle, are no longer a cause for concern. Historical stress in large corporates has been recognised and provided for, said Philip.

India Ratings and Research shared that view. Besides the publicly known points of stress, chances of a large corporate account slipping are low, the rating agency said. In some cases, banks have built up provisions against these accounts and will likely add more in the fourth quarter of FY22, the report added.

Since restructuring was not mandatory, some banks restructured more than others. As such, the risk of slippage from restructured to non-performing loans differs considerably across lenders.

Among large banks, State Bank of India's restructured assets are at about 1.6% of advances, while Bank of Baroda has restructured 2.9% of loans. Bank of India and Union Bank of India have restructured about 4% of loans.

HDFC Bank Ltd. has restructured 1.4% of its loans, while ICICI Bank Ltd. has restructured 1.2% and Axis Bank Ltd. has recast 0.7% of advances. Yes Bank Ltd. has restructured 3.9% of loans.

The highest share of restructured loans lies with Karnataka Bank (8%), DCB Bank (8%), Bank of Maharashtra (6%), IDBI Bank (6%) and City Union Bank (6%), according to data released to exchanges.

Most banks have set aside provisions to deal with slippage of restructured loans. The RBI required lenders to maintain additional provisions of at least 10% against recast loans. Some large banks have voluntarily kept aside even higher Covid-19 provisions.

Provisions will help banks withstand any adverse impact, said Gupta. “In case the slippages from the restructured book are higher than 20% of the total restructured book, the provisions may not be sufficient,” he added.